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Highlights

Also on KPMG.com

At Autumn Statement, the UK Government confirmed that they will be going ahead with their latest proposals to change the taxation of long-term resident non-doms living in the UK and non-doms who were born in the UK with a domicile of origin in the UK ("returners"). The proposed new rules have been subject to consultation and are set to come into force from 6 April 2017 with the draft legislation being included in the draft Finance Bill 2017 published on 5 December, 2016. Whilst the changes are clearly aimed at individuals, it is important that employers are aware of the way in which their assignees and senior executives may be impacted.

Current rules

All UK resident non-UK domiciled individuals can claim the remittance basis of taxation meaning they are subject to UK tax on:

UK source income and gains in the tax year in which they arise; and,

Any foreign income or gains in the tax year in which they are brought into (remitted to) the UK.

Claiming to be taxed on the remittance basis does not require the payment of a charge for the first 7 tax years of tax residency but comes at a cost thereafter if the individual has at least £2,000 of unremitted foreign income or gains. A Remittance Basis Charge (RBC) is levied as follows:

RBC of £30,000 for the relevant tax year when the individual has been UK resident for at least 7 out of the preceding 9 UK tax years;

RBC of £60,000 for the relevant tax year when the individual has been UK resident for at least 12 out of the preceding 14 UK tax years; or

RBC of £90,000 for the relevant tax year when the individual has been UK resident for at least 17 out of the preceding 20 UK tax years.

For inheritance tax (IHT) purposes, in general non-UK domiciled individuals are presently only within the scope of UK IHT on their UK situated assets. However, such individuals become "deemed-domiciled" in the UK for IHT purposes when they have been UK tax resident for at least 17 out of the previous 20 tax years (the '17 out of 20' rule). From this point they are within the scope of UK IHT on their worldwide assets in the event of their death and this can continue to be the case for an additional 4 tax years after they have cease to be tax resident in the UK.

Upcoming changes

The new rules, which will apply from 6 April 2017, will be as follows:

All long-term UK tax resident, non-UK domiciled individuals will become 'deemed' domiciled in the UK and will become subject to UK taxation on their worldwide income and capital gains on an arising basis once they have been resident in the UK for at least 15 out of the previous 20 tax years.

The UK IHT position of such long-term UK tax resident, non-domiciled individuals will be aligned with their income tax and capital gains tax treatment as set out above. So the current 17 out of 20 rule will cease to apply and they will become 'deemed' domiciled for UK IHT purposes if they have been resident in the UK for 15 out of the previous 20 tax years. The 4 year tail will remain where deemed domiciled individuals cease to be UK tax resident (and their deemed domicile will re-establish if they become UK tax resident within 6 tax years).

Individuals who were born in the UK with a UK domicile of origin but have since acquired a domicile of choice in another jurisdiction will now be automatically deemed domiciled in the UK if and when they re-establish UK tax residency, with a short grace period for IHT.

Special new rules will be introduced in respect of non-UK resident trusts established by non-UK domiciled individuals who go on to become 'deemed' domiciled in the UK. The rules will broadly allow for non-UK income and capital gains to be rolled up within such trusts without a UK tax charge so long as there are no additions to the trust and the settlor and close family members do not receive any income, capital or other benefits from the trust.

UK residential property owned by non-UK domiciled individuals (or trusts set up by such individuals) through offshore companies or partnerships will fall within the scope of UK IHT, as will loans (or assets given as security for a loan) made to finance the acquisition, maintenance or repair of such property. This is whether or not the individual has become deemed domiciled in the UK and irrespective of their UK tax residence status at the date of death.

Key considerations for individuals

The upcoming rule changes affecting non-UK domiciled individuals are not all bad news and in this respect there are some important points which should be borne in mind by those who are potentially impacted. Three of these are listed below and, for the first, action will be required well before the formal deadline of 6 April 2019.

Separation of offshore mixed funds

The Government are proposing a two year window - from 6 April 2017 to 5 April 2019 - during which period all non-UK domiciled individuals who have been taxed on the remittance basis at some stage prior to 6 April 2017 (but not returners) will be able to reorganise their offshore "mixed" funds. In particular, this means they will have a limited opportunity to separate out these funds into their different underlying categories of income, capital gains and "clean capital" so that they can become accessible as such.

Over time, non-doms may have accumulated a variety of accounts with sources of UK income, foreign income, capital gains and capital where it can be very difficult to identify any tax cost of remitting funds to the UK. The accounts are called "mixed" funds and there are a strict set of rules designed to identify exactly what is being remitted. The mixed fund rules can mean that non-UK source income and gains in one tax year are deemed to be remitted before 'clean' capital, and before UK source income and gains for a previous tax year, which currently leads to the problem of "trapped funds". The ability to untrap these funds is therefore very welcome and it appears that Government is seeking to make this as straightforward and as flexible as possible. As noted, this exercise will need to be completed before the deadline of 5 April 2019. The special treatment will only apply to mixed funds which consist of amounts deposited in bank and similar accounts.

Rebasing the value of offshore assets

Individuals who become deemed domiciled in the UK under the 15 out of 20 year rule in April 2017 (again, with the exception of returners), will be provided with an opportunity to rebase their offshore assets to their market value on 5 April 2017. This will mean that only gains accruing from 6 April 2017 onwards will be within the scope of UK capital gains tax upon the eventual sale of these offshore assets. The rebasing will only apply to assets held on 5 April 2017 that have been non-UK situated at any time from 16 March 2016 to 5 April 2017.

However, a key point here is that this opportunity will only be available to individuals who will become 'deemed' domiciled in the UK on 6 April 2017 and who have previously paid the RBC in a tax year prior to 2017/18.

A "protected" trust regime for non-UK trusts

As a result of the consultation process, the Government have revisited their original proposals for the creation of a "protected" trust regime for non-UK trusts settled by individuals before they become deemed domiciled in the UK. The result is an alternative approach where liability to income tax or capital gains tax is dependent upon the extent to which benefits or capital payments are received from the non-UK trust. Accordingly, new provisions have been announced which, in certain circumstances, will treat the settlor as the recipient of any benefits and capital payments received from the trust by a "close family member". Protected status will be available for non-UK trusts settled by individuals before they become deemed domiciled in the UK, and will continue provided the settlor makes no direct or indirect additions to the trust after they have become deemed domiciled in the UK. The Government have confirmed that protected trust status will not apply to settlors who become deemed domiciled under the 'returners' rule.

The introduction of the new regime means that individuals who are currently non-UK domiciled may want to consider establishing a foreign trust before they become deemed UK-domiciled.

Key considerations for employers

With these new rules coming into operation from 6 April 2017, employers will want to carefully consider the impact of the changes on their non-domiciled UK-based employee and assignee populations. We have outlined below a number of actions which an employer may wish to consider taking at this time.

1) Employers may wish to inform UK-based employees and assignees about the proposed changes, their timing and the potential need to take further advice. It may be that many impacted employees are fully aware of the changes, but it is almost certain that some will not be. In particular, it is important to note the following:

The two year opportunity to separate mixed funds is available to all UK non-doms (except returners) and not just those who will become deemed domiciled in the UK from 6 April 2017. Even those employees or assignees who have lived in the UK for only a short time may be interested in taking this opportunity, especially if they need access to offshore funds in the near future for UK expenditure, for example, to purchase a UK home.

Employees who were born and originally domiciled in the UK but who have settled abroad and subsequently acquired a non-UK domicile of choice, but who would become UK deemed domiciled on their return to the UK, may be particularly concerned as to their UK tax position if they were to return to work here. It will be important that they properly understand the position and have the opportunity to ask questions or take such personal advice as they may see fit to address their own particular circumstances (e.g. as regards their IHT position).

The ability to re-base foreign assets for capital gains tax purposes (for those non-UK domiciled individuals who will become deemed domiciled on 6 April 2017 and who have previously paid the RBC) may have a significant impact on an individual's UK tax position and this aspect should not be overlooked. That said, this opportunity will not apply to returners.

2) Employers may wish to review their assignee population to identify those non-UK domiciled individuals who will be impacted by the new rules and to consider the potential impact on their assignees under their global mobility policy. Adjustments may be required to policy to ensure that the original spirit of the policy is upheld in spite of the change in legislation.

Please do get in touch with your usual KPMG contact as soon as possible if you would like to discuss any of the above in detail. You can also email us at employersclub@kpmg.co.uk.